uploads///sector versus country flows

Currency-Hedged European and Japanese ETFs Were in Vogue in 2015


Jan. 9 2016, Updated 12:06 p.m. ET

International ETFs accounted for 45% of net inflows

The US market dominates the global ETF space, with roughly 72% of global ETF assets. Among the many sponsors in the US ETF space, BlackRock (BLK), Vanguard, and WisdomTree are the top three ETF providers.

iShares, Blackrock’s ETF business, offers the most liquid international ETFs. In 2015, international ETFs accounted for 45% of all net inflows despite the fact that these ETFs account for only 20% of aggregate ETF assets.

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Investors fled from sector ETFs

The industrial slack across the globe, which affected industry performance, seems to have caused a shift from sector investing to international investing. Volatile times seemed to offer good arbitrage opportunities for investors ready to take on the risk.

In 2015, industry-focused funds recorded net outflows. The Industrial Select Sector SPDR ETF (XLI), the Consumer Staples Select Sector SPDR ETF (XLP), the iShares US Technology ETF (IYW), and the iShares US Real Estate ETF (IYR) recorded net outflows of $2.7 billion, $2.1 billion, $2 billion, and $1.4 billion, respectively.

Europe and Japan were in vogue

On the other hand, Europe (VGK) and Japan (EWJ) seemed to attract a lot of investor interest. We shed light on the relative value offered by these economies in our October 2015 analysis, US Equity Is Expensive: Japan and Europe Offer Relative Value. Seeing the relative devaluation of the currencies perpetuated by monetary policy measures initiated in these economies, investors have been cautious about parking their funds while hedging their forex exposures by using currency-hedged ETFs.

The WisdomTree Europe Hedged Equity ETF (HEDJ), which offers currency-hedged exposure to European equity, recorded about $13.9 billion in net inflows in 2015. The Deutsche X-Trackers MSCI EAFE Hedged Equity ETF (DBEF) is another currency-hedged European (50%) and Japanese (23%) equity-tracking ETF. DBEF recorded $12.6 billion in inflows. Our series Hedged Equity Funds: Must-Knows for Foreign Investment offers relative and trend analysis of European and Japanese (DXJ) currency-hedged ETFs.

Among the ETF sponsors, BlackRock (BLK) and Vanguard continued to dominate the ETF space in 2015.


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